Phil Castle, The Business Times

The United States economy likely will slip into recession, but a short and shallow one, according to a forecast from a think tank tracking a variety of indicators.

A recession also is expected in Europe along with slowing in China, said Dana Peterson, chief economist of the Conference Board based in New York. 

Erik Lundh, principal economist at the Conference Board, said the U.S. economy likely will contract in the fourth quarter of 2022 and first quarter of 2023, but then grow for the reminder of 2023.

Gross domestic product, the broad measure of goods and services, decreased in the U.S. at an annual rate of 1.6 percent in the first quarter of 2022 and six-tenths of a percent in the second quarter  — two quarters of consecutive declines in GDP that by one definition constitutes a recession.

Peterson and Lundh discussed the economic outlook during a virtual media briefing.

It’s important to consider the fortunes of the U.S., Europe and China, Peterson said, because they collectively account for more than half of goods and services produced in the world.

Peterson said three of what she described as “mega trends” affect that outlook. They include the continued effects of the COVID-19 pandemic and related restrictions, the war in Ukraine and rising interest rates intended to curb inflation.

Downside risks likely to lead to recession outnumber upside expectations a recession could be avoided, she said.

Other risks including labor and material shortages. Policies promoting renewable energy could cause higher prices in the short-run, but lower prices in the long term, she said.

Pandemic lockdowns persist in China, affecting manufacturing there. Energy prices have increased — especially natural gas prices in Europe in the midst of the conflict in Ukraine.

In the U.S., the Federal Reserve has increased a benchmark interest rate to a range of 3 percent to 3.25 percent, the highest level since the early 1980s. The Conference Board has forecast the rate to rise to 3.75 percent to 4 percent, Peterson said.

Higher interest rates are expected to slow the economy and in turn lower inflation.

Lundh said inflation likely will slow at the end of 2022 and into 2023. 

But it could be a while before inflation returns to the Federal Reserve target rate of 2 percent annual change in the Personal Consumption Expenditures price index. “That’s not going to happen in the foreseeable future.”

Peterson said some industry sectors are more sensitive to higher interest rates than others, including the housing, real estate and financial sectors.

Meanwhile, higher prices for food, gasoline and housing affect discretionary spending for restaurant meals and travel, she said.

Lundh said increased federal spending on infrastructure will kick in and contribute to economic growth, but also could drive up prices for labor and materials.

The U.S. labor market remains “incredibly strong,” he said. Reluctant to let employees go, employers are more likely in a downturn to institute hiring freezes.

A strong labor market and rising wages could help in limiting the length and severity of a recession, he said.

But there’s also a possibility a recession could be worse than anticipated, he added. “There are a whole host of risks.”

Peterson agreed. “There are tremendous downside risks and  uncertainty.”